FIDUCIARY DUTIES AND REGULATORY RULES

1 FIDUCIARY DUTIES AND REGULATORY RULES LAW COMMISSION LAW COM No 236 The Law Commission (LAW COM No 236) FIDUCIARY DUTIES AND REGULATORY RULES REPORT ON A REFERENCE UNDER SECTION 3(1)(e) OF THE LAW COMMISSIONS ACT 1965 Presented to Parliament by the Lord High Chancellor by Command of Her Majesty December 1995 LONDON: HMSO net -. Cm 3049 The Law Commission was set up by section 1 of the Law Commissions Act 1965 for the purpose of promoting the reform of the law. The Commissioners are: The Honourable Mr Justice Brooke, Chairman Professor Andrew Burrows Miss Diana Faber Mr Charles Harpum Mr Stephen Silber QC The Secretary of the Law Commission is Mr Michael Sayers and its offices are at Conquest House, 37-38 John Street, Theobalds Road, London, WClN 2BQ.

2 The terms of this report were agreed on 1 November 1995. , i 1 11 THE LAW COMMISSION FIDUCIARY DUTIES AND REGULATORY RULES CONTENTS Paragraph Page SECTION A: INTRODUCTION PART I: - INTRODUCTION AND SUMMARY OF MAIN RECOMMENDATIONS Terms of reference Background Consultation paper Subsequent developments The consultation The Oxford seminar Recommendations Structure of the report Acknowledgements SECTION B: LEGAL AND REGULATORY DEVELOPMENTS PART 11: INTRODUCTION AND SUMMARY OF PROVISIONAL VIEWS ON ACQUISITION OF KNOWLEDGE, CONTRACTUAL TECHNIQUES AND CHINESE WALLS Introduction 8 Acquisition of knowledge by a firm 9 Contractual techniques 10 Trade custom and RULES of practice 10 1 11 11 Chinese walls 13 Exclusion clauses Disclosure and consent PART 111.

3 LEGAL DEVELOPMENTS - CASES Introduction El Ajou Meridian Kelly Express contractual terms Implied terms Trade custom Glynwill Chinese walls Clark Boyce 14 14 18 21 23 23 25 27 27 29 .. 111 PART IV LEGAL DEVELOPMENTS - DIRECTIVES, STATUTES AND REGULATIONS Introduction Directive on Unfair Terms in Consumer Contracts Investment Services Directive Criminal Justice Act 1993 PART V REGULATORY DEVELOPMENTS Introduction The Large-Report The Personal Investment Authority RULES on disclosure of commission SECTION C: THE ISSUES ARISING FROM CONSULTATION PART VI.

4 SUMMARY OF PROVISIONAL CONCLUSIONS AND CONSULTATION ISSUES Introduction Provisional conclusions and consultation issues PART VII: MODIFICATION OF THE NORMAL INCIDENTS OF A FIDUCIARY RELATIONSHIP BY EXCLUSION CLAUSES, DISCLOSURE AND CONSENT, AND CHINESE WALLS (Question 1) Consultation issue Summary of respondents views Exclusion clauses Disclosure and consent Chinese walls As a matter of private law As a matter of public law Conclusion PART VIII: CROSSING CHINESE WALLS (Question 2) Consultation issue The necessity of crossing Chinese walls Taking an analyst out of circulation Conclusion PART IX: OVERLOOKING CHINESE WALLS, STOP LISTS AND WATCH.

5 LISTS (Question 3) Consultation issue iv Paragraph Page 31 31 35 36 37 37 38 38 40 40 42 42 43 43 47 48 50 56 58 58 59 60 61 Paragraph Page Summary of respondents views Conclusion 61 62 PART X: SHOULD FIDUCIARY LAW TAKE ACCOUNT OF REGULATORY RULES ? (Question 4) Consultation issue Summary of respondents views 63 63 I I PART XI: - LEGISLATIVE PROVISION THAT THE COURTS MUST TAKE ACCOUNT OF REASONABLE REGULATORY RULES (Question 5) Consultation issue The need for legislation No reform Safe harbour type solutions Conclusion on the main issue Subsidiary issues Legislative guidance as to what constitutes reasonableness Burden of proof The time when reasonableness should be determined 64 64 65 67 69 70 71 71 71 PART XII.

6 OTHER LEGISLATIVE POSSIBILITIES (Question 6) Consultation issue Codification of FIDUCIARY DUTIES Legitimation of generalised advanced consents Reform of the RULES on attribution of knowledge Pooling of knowledge Use of confidential information Groups of companies Recent legal developments Views on reform Exculpation of fiduciaries who the court considers have acted honestly and reasonably 72 72 72 73 73 74 75 76 78 79 SECTION D: RECOMMENDATIONS PART XIII: INTRODUCTION TO FINAL RECOMMENDATIONS 80 RECONSIDERATION OF OUR MAIN PROVISIONAL CONCLUSION PART XIV Introduction 81 Reasons for considering that FIDUCIARY law should take account of reasonable REGULATORY RULES 81 Does this policy represent the law?

7 82 Impact of contractual techniques 84 V Examination of our provisional recommendation Revised formulation of our provisional recommendation Conclusion PART XV: EXCULPATORY PROVISION General Guidelines Scope Relation to existing legislation Particular features of section 61 Conclusion PART XVI: CHINESE WALLS Introduction Doubts about the efficacy of Chinese walls The need for Chinese walls Resolving the doubt Definition of Chinese walls Degree of protection To whom should it apply? PART XVII: OTHER OPTIONS FOR REFORM Reform of the RULES on attribution of knowledge Codification of FIDUCIARY DUTIES Legitimation of generalised advanced consents PART XVIII: APPENDIX A: APPENDIX B: APPENDIX C: APPENDIX D: APPENDIX E: APPENDIX F: APPENDIX G.

8 SUMMARY OF RECOMMENDATIONS Draft Financial Services (Amendment) Bill with Explanatory Notes Relevant extracts from the Financial Services Act 1986 Core Rule 36 Relevant extracts from the Trustee Act 1925 List of persons and organisations who commented on Consultation Paper No 124 List of those who attended the O5ford Seminar List of others who have assisted with the project Paragraph Page 86 87 89 90 91 91 93 94 96 97 97 98 99 100 102 105 108 108 108 109 111 116 118 119 120 124 125 GLOSSARY OF ABBREVIATIONS In this

9 Report the following terms and expressions are used for the sake of brevity: BMBA Company Law Committee DTI ~FIMBRAy FSA ccIMRO ISD ((the Large Report LAUTRO PIA CCWBYY SFA UCTA UTCCD El Ajou Meridian British Merchant Banking and Securities Houses Association (now the London Investment Banking Association) The Law Society s Standing Committee on Company Law Department of Trade and Industry Financial Intermediaries, Managers and Brokers REGULATORY Association Financial Services Act 1986 Investment Management REGULATORY Organisation Limited Investment Services Directive, Council Directive 93/22/EEC (OJ L141 , , p 27) the report by Mr Andrew Large called Financial Services Regulation - Making the Two Tier System Work (May 1993)))

10 Life Assurance and Unit Trust REGULATORY Organisation Personal Investment Authority Recognised Professional Body, ie a body which regulates the practice of a profession and is recognised by the Secretary of State under FSA, section 18 The Securities and Futures Authority Limited The Securities and Investments Board Self-Regulating Organisation recognised by the Secretary of State under FSA, section 10 Unfair Contract Terms Act 1977 Unfair Terms in Consumer Contracts Directive, Council Directive 93/13/EEC (OJ L95, , p 29) I Cases I El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685; the decision of Millett J at first instance is reported at [1993] 3 All ER 717.